Passive is catching up

Those who felt that passive investing is for sissies need to sit up and look around. In the past one year, the asset base of equity ETFs has shot up from Rs 15,066 crore as on March 31, 2016 to Rs 43,234 crore as of March 31, 2017, according to the AMFI data. An exchange traded fund (ETF) is similar to an index fund, which invests in a basket of securities, which are part of a pre-decided index, in the same proportion as that of the index. For instance, the Reliance ETF Sensex will invest in exactly the same proportion as the constituents of the S&P BSE Sensex.

The surge in the assets is attributed to the increasing contribution into ETFs by retail investors as well as the Employees’ Provident Fund Organisation (EPFO). Moreover, as part of its disinvestment strategy, the government has from time-to-time opened the CPSE ETF for subscription, which has also brought in more investors under the ETF umbrella. The universe of equity ETFs is also on the rise with 47 such ETFs listed on exchanges.

Apart from the contribution through the EPFO, small investors are taking a shine to ETFs, including investors in Tier II and Tier III cities, who see merit in taking part in the equity markets, with fewer risks compared to the actively managed funds. The low management cost in ETFs, and the government push towards disinvesting through the ETF route is making several first time investors put their monies into these instruments.

To benefit from investing in ETFs, adopt the systematic investment route, especially when the ETFs are largely based on broad diversified equity indices, which reduce the investment volatility.